Dollar bounces back

The USDJPY pair extended its recovery to 156.00 in Friday’s European trading, as the Dollar rebounded strongly after the Fed ruled out expectations of rate cuts, despite an expected decline in the US Consumer Price Index data for April.

On Thursday, the communication from Federal Reserve policymakers suggested that a one-time decline in the CPI is not sufficient to indicate a change in the overall trend.

New York Fed Bank President John Williams said he doesn’t see any economic indicator suggesting the need to change the stance of monetary policy now. When asked about the inflation outlook, Williams said, “in the very near term, I don’t expect to get that greater confidence that we need to see on inflation progress towards a 2% goal,” according to Reuters.

The situation of the restrictive interest rate stance by the Fed for a longer period is favourable for the US Dollar and bond yields. The DXY Dollar Index, which tracks the Greenback’s value against six major currencies, rose to 104.70, while 10-year US Treasury yields rose to 4.39%.

Meanwhile, the speculation for the Fed to begin reducing interest rates from the September meeting remains firm.

The CME FedWacth tool shows that the probability of interest rates declining from the current levels in September is 68%, down from 73% recorded after the release of the soft inflation data.

On the Japan front, weak Q1 Gross Domestic Product (GDP) data has prompted fresh challenges for the Bank of Japan with their agenda of tightening monetary policy further. The Japanese economy contracted at a higher pace of 0.5% from the estimates of 0.4%.

(Source: OANDA)